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Consider XYZ stock currently worth S95. On Jan 15h, 2019, you plan to sell it9 months later on Oct 15th, 201 may have fallen significantly by then. To hedge this risk, you enter into a forward contract to the stock which will mature on Oct 15th, 2019. Assume that the risk- free interest rate will remain at 3.0% pa. in 2019. Use continuous compounding method and YEARFRAC function with ACT/ACT basis Show your answers along with the formula and steps you used for each question 9 to raise money, but are concerned that the price A) Ans: Question 2: Assume that XYZ stock will pay dividends as follows. On Feb 15th, Apr 15 and Sep 15th, it will pay $1.5 dividend each. A) Calculate the theoretical price of the forward today? (2 points) B) Suppose you took the short position at the forward price computed in (A) above. On May 15th, 2019, the spot price of the asset is $95. What is the market value of your short position in the forward contract at this point? (2 points) C) What is the value of the forward contract at expiration assuming the contract is entered into at the price computed in (A) above. The spot price of the asset is $92 at expiration. (1 point) D) Ans D) Suppose you took the short position at the forward price computed in (A) above. What will be your annualized rate of return at expiration? (1 point)

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Answer #1

Please refer to below spreadsheets for calculations and answers.

A.

Formula reference-

B.

Formula reference -

U28 21 22 B 23 -C30 Spot Price of on May 15th,2019 Spot date expiry date Theoretical Price of Forward in (A Time (t), Expiry

C.

E46 DI 31 32 C) 0.60 34 35 36 $ $ Market Value of Forward contract on Spot date |$ 92.00 92.60 0.60 Theoretical Price of Forward in (A)

Formula reference -

D.

E46 37 38 D 2.95% Stock Spot Price(S Current date expiry date Time(t Theoretical Price of Forward in (A Dividend Received Ret

Formula Reference -

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